Financial News

Inflation To Hit 3% Or More - Bank of England

The Bank of England said it expects the UK economy will see a "slow, but sustained recovery" but has warned that inflation will rise to 3% or more.

Bank governor Sir Mervyn King said inflation was expected to remain above the 2% target for another two years.

The forecast was made after the bank published its quarterly inflation report.

Sir Mervyn said: "There is cause for optimism ... Today, too, the recovery is in sight.

"Although output has been broadly flat for the past two years, that masks a more encouraging underlying picture."

But the BoE forecast means that the UK economy will not regain its pre-crisis level until 2015.

Sir Mervyn added: "The UK economy is therefore set for recovery. That isn't to say that the road ahead will be smooth."

He said there were limits to what further stimulus of the economy could achieve.

The governor said the bank remained ready to do more to help the economy if needed.

"We must recognise, however, that there are limits to what can be achieved via general monetary stimulus - in any form - on its own," he said, adding that incentives to spend now reduced spending plans of households and businesses in the future.

The BoE has spent £375bn on buying government bonds as part of quantitative easing but has held off from increasing the programme.

Government debt prices fell after the governor's comments.

Sterling fell against the dollar and the euro after the lowered growth forecasts and said it was ready to provide more monetary stimulus if warranted.

Sir Mervyn also said that the BoE should not risk tightening monetary policy, even as it pushed back its expectations for when inflation would return to its target to early 2016, because the economy remained weak.

"Attempting to bring inflation back to target sooner would risk derailing the recovery and undershooting the target in the medium term," he said.